News of the week summary - 12/10/2023

Unprecedented rise in Chinese defaults amid economic challenges

Against the backdrop of the COVID-19 pandemic's economic repercussions, China is grappling with a notable surge in borrower defaults, exposing the depth of the country's economic struggles. Approximately 8.5 million citizens find themselves blacklisted for falling behind on payments. This cohort, constituting roughly 1% of working-age Chinese adults, marks a significant uptick from 5.7 million in early 2020.

Chinese law imposes restrictions on blacklisted individuals, hindering their economic activities such as buying plane tickets and utilizing popular mobile payment apps like Alipay and WeChat Pay. The initiation of blacklisting typically follows creditor lawsuits against borrowers who subsequently miss payment deadlines.

This personal debt crisis follows a borrowing spree by Chinese consumers, with household debt relative to GDP nearly doubling over the past decade, reaching 64% in September. This financial strain intensifies as wage growth stalls or turns negative, leaving a growing number of consumers struggling to meet their financial commitments. China Index Academy, a consultancy, reported a 30% rise in foreclosures in China year-on-year, totaling 584,000 in the first nine months of 2023. 

Argentina's new economy minister faces a trouble economy

Argentina's president-elect, Javier Milei, has chosen Luis Caputo as the economy minister, causing a sense of relief among investors due to Caputo's known expertise. Caputo, a former Wall Street trader, previously held key financial positions under conservative ex-President Mauricio Macri. However, he is taking charge of Argentina's economy at a precarious moment, with inflation soaring above 140%, depleted foreign currency reserves, and complex controls implemented by the current government.

Milei's election, promising rapid economic overhaul, has led to a market rally, supported by a pragmatic shift in his approach. Caputo's political inexperience raises questions about how he will collaborate with the unconventional Milei, especially given Argentina's longstanding economic challenges, including stagnation and a persistent fiscal deficit.

Caputo faces the daunting task of managing short-term liabilities, renegotiating a $43 billion deal with the International Monetary Fund, and addressing economic imbalances. While Caputo leans towards a voluntary debt swap and emphasizes fiscal balance, the path forward remains uncertain. Dollarization, a contentious campaign promise by Milei, seems temporarily on hold.

The scope of his new role remains unclear. Business leaders express mixed sentiments, appreciating Caputo's credibility but expressing concerns about the complex economic situation. As Milei plans a "shock" package of spending cuts, the collaboration between the technical Caputo and the iconoclast president-elect will be crucial in addressing Argentina's economic challenges.

Bitcoin surges and gold hits its highest level ever

Bitcoin reached its highest price in almost 20 months, shortly exceeding $42,000, driven by investors anticipating a fall in interest rates next year. The cryptocurrency's surge was also fueled by optimism that the most severe regulatory punishments for the industry are behind.

In parallel, gold reached an all-time high of $2,135 per troy ounce before settling at $2,025 per troy ounce. This follows a broader trend of investors rushing into stocks and bonds amid expectations that the Federal Reserve will cut borrowing costs.

Analysts note similarities in the evolution of Bitcoin and gold, with both assets performing well when the Fed aggressively cuts rates. Traders anticipate a potential rate cut as early as March, given the decline in government and corporate borrowing costs, especially as US bond markets witnessed their most significant monthly rally in nearly four decades in November. Recent US economic data's resilience, coupled with falling inflation, further supports the attractiveness of riskier assets like stocks.

Investors are hopeful for SEC approval of a Bitcoin exchange-traded fund (ETF) in the coming weeks, as the SEC has historically resisted approving spot Bitcoin ETFs. Approval is seen as a way to legitimize digital assets and shift control from scandal-ridden crypto groups to mainstream financial institutions.

Moody's downgrades its outlook on China's credit rating

Moody's has downgraded its outlook on China's sovereign credit rating to negative, citing concerns over persistently lower midterm growth and the impact of the property sector crisis. The rating agency sees evidence that the Chinese government and state companies might provide financial support to weaker regions, posing broad downside risks to China's fiscal, economic, and institutional strength. China's finance ministry expressed disappointment with Moody's decision, asserting that the country's macroeconomy is recovering, and high-quality development is progressing steadily.

Moody's maintains an A1 long-term local and foreign-currency issuer rating for China. It expects China's GDP growth to be 4% in 2024 and 2025, while the finance ministry anticipates economic growth of 5% for this year. 

Moody's advised its staff in China to work from home before the downgrade, worried about the government's reaction to the news. This reflects the apprehensions many foreign businesses have about operating in China, where some have faced police raids, exit bans, and arrests amid geopolitical tensions. 

Inflation in OECD countries hits 2-Year low

Inflation in OECD countries (which consists of the world’s wealthiest economies)  dropped to its lowest rate in two years in October, according to data from the agency, providing central bankers with more confidence in their efforts to curb rising prices. The annual pace of consumer price growth in the group slowed to 5.6%, down from 6.2% in September, marking the lowest level since October 2021. This comes after a peak of 10.7% in October of the previous year, driven by geopolitical events (most notably Russia's invasion of Ukraine).

Despite the positive trend, major central banks like the US Federal Reserve, the Bank of England, and the ECB have left interest rates unchanged in their recent meetings. Analysts suggest that the market is now anticipating not the next rate hike but the possibility of the first rate cut.

Separate data for the eurozone, published last week, also indicated a continued decline in inflation, falling more than expected to 2.4% in November from 2.9% the previous month. This trend is viewed positively by rate-setters, indicating that their tighter monetary policy is effective.

The easing of headline inflation was primarily driven by cooling energy prices, which dropped by 4.8% in October year-on-year across the OECD. Food inflation also saw a decline to 7.4% in October from 8.1% in September, with decreases observed in 32 out of 38 OECD countries. Core inflation, excluding food and energy, marginally eased to 6.5% in October from 6.6% the previous month.